- After an astonishing 2020, tech stocks had their worst month since the Covid crash
- Amazon, Apple and Alphabet fell 3.2%, 7.28% and 2.24% since mid-September
- Facebook loses $100 billion after a barrage of bad headlines
- Wall Street’s top tech fund – ARK Innovation – is down 26% since February
- Legendary ‘Big Short’ investor Michael Burry is now betting against the fund
As the world’s stock markets prepare for a winter of uncertainty, one region in particular may experience a chill.
After a surprising year in 2020, technology stocks ended their worst month since the Covid crash, with the tech-heavy US index Nasdaq 100 falling 5.91 per cent in September.
Amazon, Apple and Alphabet (formerly known as Google) have declined 3.2 per cent, 7.28 per cent and 2.24 per cent since mid-September.
And social media giant Facebook has lost $100 million in value after a shower of bad headlines.
Meanwhile, Wall Street’s best-known tech fund — ARK Innovation — has fallen 26 percent since February as big investors fear a sweeping change in fortunes.
Tech slowdown: Amazon, Apple and Alphabet (formerly known as Google) have reported 3.2 per cent, 7.28 per cent and 2.24 per cent declines since mid-September.
Legendary investor Michael Burry (whose bet against the US sub-prime mortgage market was immortalized in the 2015 blockbuster The Big Short) is now betting against the fund.
So is big tech facing a squeeze? And will it affect your portfolio?
First, it’s worth noting that the slow pace of momentum was not unexpected for tech stocks. Due to worldwide lockdowns, 2020 turned out to be a boom year for internet firms, with the Nasdaq 100 rising nearly 47 percent in a year.
Whether these shocking valuations hold up has been a hotly debated topic, with many speculating that a rebalancing towards ‘offline’ stocks is inevitable.
Rob Morgan, chief analyst at investment platform Charles Stanley, says: “When the market collapsed 18 months ago, a wall of cash hit the stock market and much of it was directed at trendy areas.
‘We have already seen major declines in many clean energy stocks, for example, simply because valuations have diverged from reality.’
Indeed, such a feeling has already come for some tech companies. At its highest point in October 2020, video conferencing platform Zoom was up 722 percent in ten months. Its share price has fallen more than 22 percent this year, and has fallen 51 percent since its peak.
Meanwhile, FTSE-listed cryptocurrency miner Argo Blockchain — whose stratospheric rise made it a popular pick for DIY investors — has fallen 55 percent since February.
Beyond these examples, the tech sector is particularly exposed to the now-ubiquitous threat of inflation. “When inflation rises, investors want a higher return on their money, which causes asset prices to come down,” says Mr. Morgan.
On top of this, valuations of tech companies are often based on their expectations of future profits and the belief that they can continue to borrow cheaply.
Should central banks raise rates to keep inflation under check, this could affect profit forecasts – making tech firms less attractive.
Due to worldwide lockdowns, 2020 turned out to be a boom year for internet companies, with the Nasdaq 100 growing nearly 47 percent in a year.
But Morgan says investors should be cautious about drawing broad conclusions about the entire tech sector.
He points out that some of the biggest tech companies — such as Microsoft and Alphabet — are valued only slightly above the US average.
“The sector still enjoys large tailwinds, as more businesses seek to store their data on cloud services,” he says.
And, of course, the most dramatic moves in prices are usually down to factors affecting that company, as the Facebook example shows.
The social media firm’s share price has dropped nearly 13 percent since September 1, following a series of damning leaks about its security practices. After that the server stopped.
However, Facebook remains highly profitable and has weathered similar downturns in the past (including a 20 percent drop in 2018 at the height of the data-sharing scandal).
Some technical investors also consider short-term volatility to be part of the price to make up for the higher returns the industry can provide.
Edinburgh-based Bailey Gifford, one of the UK’s best-known tech advocates, defines her philosophy as looking for ‘superstar’ companies that can outperform the market. When it works, as it did with the company’s initial stakes in Tesla and Facebook, it pays off well.
The theory goes that this should be more than enough to cover the failed bet.
So how has its fund performed this month?
Its super-popular Scottish Mortgage Investment Trust is up 4.37 percent over the past month — even though the Nasdaq has fallen.
The trust had already reduced its stake in Tesla and Facebook, moving to biotech companies (including vaccine maker Moderna).
Long-term investors have been well rewarded, investing £10,000 five years ago, which is now worth £43,000.
Bailey Gifford American Fund has underperformed, falling 7.9 per cent in one month. Like the Scottish mortgage, however, its long-term record is remarkable – turning £10,000 into £42,000 in five years.
Whether they hold their value will depend partly on whether September’s technical downturn turns into a complete correction.
But the events of the past few weeks have already provided a useful refresher course on some of the basic laws of investing.
They are: always…